US airlines’ ancillary revenues continue to grow, but at a slower pace for legacy carriers

The US Department of Transportation (DoT), through the Bureau of Transportation Statistics (BTS), has released second quarter data which provides some interesting numbers for consideration. Looking at the ancillary revenue collected by carriers, we find that the amounts collected continue to grow, but for most legacy airlines at a slower pace. The overall year-on-year total increased only 5%.

However, passengers flying Spirit had a quite different experience and despite its general “no fees” image, Southwest has increased its take from fees by 10% over the year.

Delta most aggressive

As we have found in previous analyses, Delta Air Lines is the most aggressive in charging its customers. Unsurprisingly, its ancillary revenue total is almost a third of the industry pie. While they are at present the largest US carrier in size, they will soon be eclipsed by United/Continental, although the merged entity will still be in a distant second place for revenue collection.

As noted in the table, income from lots of sources is not tabulated in this data, making the total passenger outlay considerably higher for many travellers. Revenue from seating assignments must be growing rapidly if customer complaints about its prevalence are any indication.

Cost and revenue

The next two tables below have combined the separate cost and revenue tables produced by the BTS. Columns with results for intervening quarters have also been removed to provide a direct year-to-year comparison.

Network carriers

The first table looks at the six network carriers. In each case, both costs and revenues per ASM have increased and, in every case except American, unit revenue has outpaced unit cost. In 2010, the cumulative cost/revenue gap was USD 1.7 cents per ASM; dropping to just USD 1 cent a year later, direct evidence of a declining profit expectation for the current year.

Low-cost carriers

As a group, the LCCs show a less outstanding overall performance with three of its members (Frontier, AirTran and Virgin America) showing a shortfall in the quarter. Again there is a narrowing gap between unit cost and unit revenue. In 2010, the group produced a USD 1.8 cent differential that has, for 2Q2011, dropped to USD 1.3 cents.

Given those shrinking margins, and hope that fees and charges will disappear – or even be reduced – is wishful thinking.

A successful strategy that cannot work forever

For the past two years, US carriers have shown extraordinary capacity restraint and all appear to make even more downward adjustments if required. However, the idea that the carriers can continue to shrink themselves into profitability has limits. Wireless anyone? Only USD10 per segment.

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